Blame the Bear Raids

The damage the market’s suffered since the U.S. Securities and Exchange Commission repealed the uptick rule last summer is undeniable, Cramer said during Thursday’s Mad Money, and regulators need to admit their mistake.

Cramer’s not blaming the Dow’s decline to 12,361 from 13,577 solely on the SEC’s decision, but the size, severity and even savageness of the declines we’ve seen since July are without question the product of this new open season for short-selling, he said.

So what is this uptick rule? After the short-selling bear raids that caused the crash of 1929 and the endless knockdown of stocks that followed, regulators required that there be a buyer willing to pay more for a stock than the last sale, known as an uptick, before that stock could be sold short. Basically, a stock had to go up a bit before it could be brought down.

That rule stayed in effect for almost 80 years until July, 6, 2007, when the SEC got rid of it. Hedge funds lobbied for a repeal, and the feds conceded after a test proved life without the uptick would be just fine. Of course, that test took place during a bull market, where a bear raid would never happen, and not an environment like the one we have now where raids are rampant.

No wonder the SEC didn’t think the sharp declines caused by bear raids could happen in today’s market. They claimed smaller spreads, higher liquidity and greater transparency would prevent such drastic downturns. But spreads don’t matter, Cramer said, and that liquidity, courtesy of a brokerage credit crisis, has disappeared.

The SEC also said that “regulatory surveillance” will “reduce the risk of undetected manipulation.” But, as Cramer pointed out, it’s too late by the time regulators get involved. Bear raids destroy confidence, taking the stock even lower, then the self-fulfilling nature of the declines gets reinforced when investors assume the company’s going out of business, causing a run, much like what happened to Bear Stearns .

So the SEC’s “recreated exactly what happened in the 1930s in this country,” Cramer said. “The cause and effect is real.”

So he called for a return to the uptick rule, for the sake of individual investors everywhere. After all, when a multibillion-dollar hedge fund is selling short 500,000 shares of a stock, shareholders are helpless.

“We will not have peace in the markets until [the uptick rule] is restored,” Cramer said.